- The US Dollar is taking a break after last week’s recovery.
- Friday’s August jobs report is expected to show a significant increase in nonfarm payrolls.
- Market expectations for a 100bp easing by the Fed by year-end remain unchanged.
On Monday, the US Dollar Index (DXY), which measures the value of the greenback against a basket of six major currencies, consolidated above 101.50, extending after last week’s gain of over 1%. Markets are awaiting key labor data this week, and the August employment report, due on Friday, is anticipated to show a robust increase in non-farm payrolls (NFP), which could provide support to the US Dollar.
Despite ongoing economic growth exceeding expectations, market anticipation of aggressive monetary easing appears to have become excessive. However, a cut by the Federal Reserve (Fed) in September is a given, but its size will depend on incoming data.
Daily Market Wrap: DXY flat on quiet Monday ahead of key data
- Consensus estimates for August nonfarm payrolls are 165,000, with an unofficial number of 150,000.
- The unemployment rate is expected to fall to 4.2%, while average hourly earnings are expected to rise to 3.7%.
- Other data this week, including the ISM manufacturing and services PMIs, are expected to ease slightly but remain in expansionary territory.
- In addition, the Fed’s Beige Book report is expected to show that the labor market remains tight.
- Dovish Fed expectations remain stable, with investors still pricing in 100bp of cuts by year-end.
DXY Technical Outlook: Index consolidates after last week’s rally, DXY should hold 101.50 line
The DXY Index experienced a consolidation phase following last week’s rally, which resulted in weekly gains of almost 1%. Currently, the Relative Strength Index (RSI) is below 50, while the MACD is showing rising green bars, indicating a possible bullish trend. Both indicators point to bullish momentum that is stabilizing but generally recovering.
The key support levels for the DXY are 101.50, 101.30 and 101.00, while the resistance levels are 101.80, 102.00 and 102.30.
Nonfarm Payrolls
Nonfarm payrolls (NFP) are part of the U.S. Bureau of Labor Statistics’ monthly employment report. The nonfarm payrolls component specifically measures the change in the number of people employed in the U.S. over the previous month, excluding the agricultural sector.
The nonfarm payrolls figure can influence Federal Reserve decisions by providing a measure of how successfully the Fed is fulfilling its mandate of promoting full employment and 2% inflation.
A relatively high nonfarm payrolls figure means that more people are employed, earning more money and therefore likely spending more. Conversely, a relatively low nonfarm payrolls figure could mean that people are having difficulty finding work.
The Federal Reserve typically raises interest rates to combat high inflation caused by low unemployment, and lowers them to stimulate a stagnant labor market.
Nonfarm payrolls tend to have a positive correlation with the US Dollar. This means that when payrolls figures are higher than expected, the Dollar tends to rise and vice versa when they are lower.
The NFP influences the US Dollar through its impact on inflation, monetary policy expectations, and interest rates. A higher NFP typically means that the Federal Reserve will be tighter in its monetary policy, which supports the USD.
Non-farm payrolls typically have a negative correlation with the price of Gold. This means that a higher than expected payrolls figure will have a depressive effect on the price of Gold and vice versa.
A higher NFP usually has a positive effect on the value of the USD, and like most major commodities, Gold is priced in US Dollars. Therefore, if the USD gains value, fewer Dollars are needed to buy an ounce of Gold.
Moreover, higher interest rates (usually helped by a higher NFP) also reduce the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm payrolls are just one component within a larger employment report and can be overshadowed by the other components.
Sometimes, when nonfarm payrolls beat forecasts but average weekly earnings were lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the drop in earnings as deflationary.
The Participation Rate and Average Weekly Hours components can also influence market reaction, but only in rare cases, such as during the “Great Resignation” or the Global Financial Crisis.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
